What you need to know from the 2021-22 Federal Budget

What you need to know from the 2021-22 Federal Budget

As Scott Morrison kept reminding us this morning, ‘we are fighting the pandemic’ and so the Federal Budget focuses on key spending to drive Australia’s economic recovery.

This is a Budget promoting economic growth and employment. While you will have those who continue to have major concerns over government debt and the continued spending, could it be that we are seeing a ‘new’ way of thinking when it comes to debt? My colleague, James Weir, wrote a paper explaining this with Modern Monetary Theory (“MMT”), suggesting maybe the focus on debt is unwarranted?

So here are the simply the main features of the 2021-2022 Budget;

Personal Income Tax

Low and middle income tax offset

This will be extended to 2021-2022 providing a reduction in tax of up to $1,080 to low and middle income earners.

Superannuation

Federal Budget - Superannuation

Removing the work test

This is actually a significant change. Individuals aged 67 to 74 years will be able to make non-concessional super contributions, or salary sacrifice super contributions without meeting the work test.

However, in order to make personal deductible contributions, you will still need to meet the work test.

Downsizer contributions

The charges announced in the Budget from that article include reducing the eligibility age for 65 to 60 years of age. This scheme allows a one-off contribution of $300,000 per person from the proceeds of the sale of their home.

To learn more about downsizer contributions and how it can work for you check out my blog here.

SMSF residency restrictions

From 1 July 2022, the Government will extend the central control test from 2 years to 5 years and remove the active member test.

Super guarantee threshold

The $450 per month minimum income threshold under which employers are not required to make a super contribution for employees will be removed 1 July 2022.

First Home Buyer Scheme (FHBS)

From 1 July 2022, the Government will increase the amount of voluntary contributions to $50,000 which may be released for the purchase of a first home.

Family Support

Family Home Guarantee

The Government has introduced the Family Home Guarantee to support single parents with dependants buying a home. This is regardless of whether they are a first home buyer or a previous owner-occupier. From 1 July 2021, 10,000 guarantees will be made available over four years to eligible single parents with a deposit of as little as 2%, subject to an individual’s ability to service a loan.

The Government is also providing a further 10,000 places under the New Home Guarantee in 2021/22. This is specifically for first home buyers seeking to build a new home or purchase a newly built home with a deposit of as little as 5%.

Increasing childcare subsidy (CCS)

To ease the cost of childcare and encourage a return to the workforce, from 1 July 2022 the Government proposes to provide a higher level of CCS to families with more than one child under age 6 in childcare. The level of subsidy will increase by an extra 30% to a maximum subsidy of 95% for the second and subsequent children. For example, currently a family may receive a 50% subsidy on childcare costs for each child if family income is between $174,390 and $253,680. Under the proposal, the family would receive a CCS of 50% of costs for their first child and 80% for their second and subsequent children. The annual CCS cap of $10,560 for families earning between $189,390 and $353,660 will also be removed.

Social Security

Pension Loan Scheme

The Government has announced added flexibility by allowing up to two lump sum advances in any 12 month period up to 50% of the annual pension.

The Government will also not claim back any more than the sale price of the house used to guarantee the payment.

Aged Care

The Government has announced a $17.7b investment in aged care reform over the next 5 years which will cover:

  • Additional Home Care Packages
  • Greater access to respite care services
  • A new funding model for residential aged care
  • A new Refundable Accommodation Deposit (RAD) support loan program.

Business Support

COVID Package

The Government will extend until 30 June 2023 the instant write-off of depreciable assets as well as the ability for qualifying companies to claim back tax paid in prior years from 2018-2019 where tax losses occur until the end of the 2022-2023 financial year.

Forgot to make that super contribution? Don’t despair, you may ‘catch-up’

Forgot to make that super contribution? Don’t despair, you may ‘catch-up’

It’s not uncommon to meet prospective clients who either forgot to make a concessional super contribution the previous year, or didn’t feel it was necessary.

However, all is not lost, with a little understood strategy which, in some circumstances, allows you to make ‘catch-up’ contributions.

So what are ‘catch-up’ contributions?

The rules around catch-up, or more accurately known as ‘Carry-forward’ contributions, simply allow super fund members to use any of their unused concessional contributions cap (or limit) on a rolling basis for five years.

So, if you didn’t make the maximum concessional contributions ($25,000 in 2019/2020), you can carry forward the unused amount for up to 5 years. After 5 years, any unused concessional contributions will expire.

The first year these rules came into force and concessional contributions could be accrued from was the 2018/2019 financial year.

Why were they introduced?

The Federal Government introduced carried-forward contributions to help those who have had interrupted working lives to get more money into superannuation. Those who had time off work to have children, care for children or loved ones, or even those who previously didn’t have the financial capacity to contribute to superannuation all benefit from these rules.

Who is eligible to make carry-forward contributions?

Anyone who has a total superannuation balance under $500,000 as at 30th June in the previous financial year is eligible to make catch up contributions.

What are concessional contributions again?

Concessional contributions are those made from pre-tax dollars. It includes:

  • employer contributions of 9.5% pa of your salary
  • Salary sacrifice contributions.
  • Lump sum contributions to superannuation which you notify your superfund provided that you intend to claim a personal tax deduction.

There is an annual $25,000 limit for concessional contributions.

How does it work?

This can best be illustrated with an example.

Tina has a total superannuation balance of $300,000. After taking a couple of years leave, she returned to work in July 2019.

During the 2019/2020 financial year, Tina was eligible to carry forward her concessional contributions she didn’t make in 2018/2019, however, she chose to not make an additional contribution above her employer contributions of $10,000.

So, for the 2020/2021 year, Tina has a total of $65,000 of eligible concessional contributions. She has done particularly well from her holding in Afterpay shares and decides to sell them giving rise to a significant capital gains tax liability. Tina has a meeting with her adviser at Steward Wealth about how she may reduce this tax liability. Her adviser recommends making full use of the carry-forward provisions and advises her to make concessional contributions totaling $65,000 (including her employer contributions). Not only will she receive a tax deduction for the contribution, but she will also grow her superannuation balance.

Forgot to make that super contribution Dont despair you may catch-up

In summary

Carry-forward provisions are a real opportunity for those who haven’t been in a position to make contributions to superannuation, or who have simply forgotten to do so.

While it can assist in building up your retirement benefit, as you can see from our case study above, careful planning can also make it a very effective tax planning tool.

Superannuation can be very complex and advice really needs to be tailored to each individual. If you would like to discuss further, the Steward Wealth team are more than happy to assist you.

Want an assessment as to how this strategy could work to maximise your financial well-being?

Call Steward Wealth today on (03) 9975 7070.

Addressing inequality would be good for the whole economy

Addressing inequality would be good for the whole economy

Inequality of incomes and wealth continues to be a well-deserved point of focus across the developed world. The US produces the best data, and by 2016 the top 1% of households held 29% of the country’s wealth, while the entire middle class owned 21% and real median income has fallen over the past 40 years. This inequality of wealth and income is actually reducing growth for the overall economy.

The chart below uses a simple, but insightful, method to argue inequality really took root under the ‘neo-liberal’ economic era. If it’s correct, that premise throws up some suggestions as to how it can be addressed.

First, what is the chart telling us? It effectively traces the relative strength of labour versus capital. When the line is trending upwards, share prices, as measured by the US’s S&P 500, are rising faster than the average wage. That means there is a greater share of the economic pie going to the owners of capital than to labour.

After WW2 the US became the world’s factory and there was a relative scarcity of workers, so wages were strong. The next bottom in the chart, around the 1970s, was when unions were throwing their weight around and the US and UK lost a record number of days to strikes. Wages were commonly indexed to inflation, which created the classic wage-price spiral: as wages rose, so did prices, which again caused wages to rise, and so on.

Then came the era of Thatcher and Reagan, and the wholehearted embrace of neo-liberalism. This philosophy, which was largely founded on the work of Milton Friedman, argued markets are best at determining the allocation of resources so the best thing governments can do is get out of their way. It coincided with the crushing of unions, and the highest interest rates ever recorded as central banks around the world followed the US Fed Chairman, Paul Volcker, in his efforts to stomp out inflation.

Neo-liberalism is also called ‘supply side economics’, the premise of which is that reducing regulation and government interference would enable markets to flourish and encourage economic growth, and the benefits of all that growth would trickle down and be shared broadly. Indeed, Paul Volcker predicted that “wages for all Americans will improve as we achieve greater productivity and moderation in the demand for nominal wage increases.”

Well, that hasn’t happened. In his terrific book, The Economists’ Hour, Binymain Applebaum writes that “the median income of a full-time male worker in 1978, adjusted for inflation, was $54,392. That number was not matched or exceeded at any point in the next four decades. As of 2017, the most recent available data, the median income of a full-time male worker was $52,146. Yet, over those same four decades, the nation’s annual economic output, adjusted for inflation, roughly tripled.”

Likewise, economist Thomas Piketty argues that, in fact, the whole of the US is worse off under the neo-liberal model: between 1910-1950 national income per capita grew at 2.1% per year, from 1950-1990 it was 2.2%, and 1990-2020 only 1.1%.

In other words, as income and wealth inequality has worsened, so too has overall economic prosperity.

The solution? On the face of it, economies would be collectively better off if there was some equalisation of power between labour and capital. It also suggests there is indeed a role for government in areas like regulating labour markets and controlling corporate power.